Gold, Miners Under Trump

Donald Trump's epic underdog victory climaxing the US presidential race was
radically unexpected by the great majority of the world. Equally if not more
surprising was the subsequent days' market reaction. Stock markets, gold,
and gold-mining stocks did exactly the opposite of what was universally forecast
for a Trump win. This has left contrarian traders wondering how gold and
gold stocks will likely fare under Trump.

Personally I'm thrilled and filled with hope for America with Donald Trump
being our next president! We desperately needed someone to overthrow Washington's
stranglehold on our lives. In both our monthly and weekly newsletters published
before Trump's apparent upset, I took the contrarian stance explaining
why Trump had far greater odds of winning than widely assumed. The stock
markets predicted
a Trump win too!

Still election night was a grueling nail-biter. As my wife and I watched the
results dribble in, I marveled at the unfolding futures action. The way the
electoral votes played out, Trump had to win Florida to have a shot
at claiming the presidency. As Florida's vote counts rose, Trump and Clinton
traded the narrow lead. The violent reactions in the futures markets as Trump's
chances of winning Florida grew were incredible.

Everyone, mainstreamer and contrarian alike, expected stock markets to tank
and gold to surge if Trump won the election. That was logical and reasonable
given how the markets reacted after that late-October FBI revelation that
a big new trove of Clinton e-mails were found to investigate. That drove
the longest stock-market losing streak in 36 years, and gold surged
in a major rally. Election-night futures mirrored this.

With expectations for a Clinton win overwhelming, as Trump pulled ahead in
the electoral-vote count stock futures literally plummeted. S&P
500 (SPX) futures dropped more than 100 points, limit down at a 5% loss!
Dow Jones Industrial Average futures collapsed as much as 800 points. All
that extreme stock-market selling ignited a massive safe-haven gold bid,
with this metal rocketing from a $1276 close to $1337!

With gold soaring, naturally the gold stocks trading in Australia and
Asia were soaring. If those gigantic gold gains had held, Wednesday would
have seen one of the largest gold-stock up days on record. But around midnight
EST, stock futures started to stabilize. Later when Donald Trump gave his
excellent magnanimous and unifying victory speech indicating Clinton had
conceded, stock futures blasted back up.

So that safe-haven gold bid quickly evaporated, which wasn't odd given the
circumstances. The strong pre-election and election-night gold-futures demand
was driven by weakening stock markets. Gold is the ultimate portfolio
diversifier because it tends to move counter to stocks. So the futures speculators
who had flooded in as stock indexes plummeted had no reason to stay as stocks
violently rebounded.

That action defying all expectations of what would happen in the wake of a
Trump victory continued on Wednesday. The SPX rallied 1.1% in its biggest
post-election-day rally since 1980 when Reagan also surprised pundits with
a big win. With stock markets just 1.2% under their mid-August all-time record
high, futures speculators continued to dump gold. It dropped from
$1300 in early US trading to just $1277 on close.

While the flagship HUI gold-stock index still climbed 2.5% despite gold only
edging a very-disappointing 0.1% higher, sentiment was devastated. The overnight
setup for 15%+ gains in gold stocks on Trump's surprise win was totally obliterated.
This left gold-stock speculators and investors depressed, dejected, and very
uncertain of this sector's future under Trump. And we are a conservative
lot politically, Trump supporters.

The stock-market rally no one saw coming on a Trump victory is certainly understandable.
His policies are very pro-growth, and hence fantastic for the US economy over
the long term! And with American voters honoring Republicans with ongoing
control of both the Senate and House, the Trump and Republican economic agendas
can move forward unimpeded. This should unleash powerful economic growth.

All this is great news for American families and the US economy, which is
why stock markets rallied on such wonderful pro-growth policies. Trump is
also talking about a massive spending campaign to rebuild our failing infrastructure
and put people back to work. Wall Street has always loved the idea of fiscal
stimulus, as higher government spending translates into bigger profits for
companies doing the work.

Seeing the Republicans led by Donald Trump blessed with two to four unhindered
years to start to undo the colossal damage done by the Democrats' and Obama's
disastrous socialist policies is a dream come true. My heart is filled with
joy at my children inheriting a much-stronger country now that the American
people wisely chose a better path. Trump will appoint judges who respect
our Constitution too, not trample it.

So in light of all this, are Trump's awesome pro-growth policies unleashing
a new stock-market bull that will retard gold investment demand for years
to come? Almost certainly not! The stock markets heading into this election
were wildly overpriced relative to underlying corporate earnings,
trading way up near bubble levels. At the end of October, the average P/E
ratio of the elite SPX companies was a staggering 26.3x!

That was still pushing the 28x
bubble level, which is twice the historical fair value of 14x. These
lofty levels are the direct result of the hyper-easy Fed artificially
levitating the stock markets since just after Obama's 2012 win. They
have been long overdue to roll over into their next
cyclical bear after such a long bull run, which would force stock
prices low enough for long enough for underlying profits to catch up.

Donald Trump himself understands this well, and has warned many times in recent
months that stock markets are in a bubble. In his first presidential
debate with Clinton on September 26th, Trump said "Believe me, we are in
a bubble right now, and the only thing that looks good is the stock market,
but if you raise interest rates even a little bit, that's going to come crashing
down. We are in a big, fat, ugly bubble."

He directly blamed that on the Yellen Fed in that very debate, "We better
be awfully careful and we have a Fed that's doing political things. This
Janet Yellen of the Fed. The Fed is doing political things." He said when
they hike rates "you will see some very bad things happen. Because the Fed
is not doing their job. The Fed is being more political than Secretary Clinton." Trump
knows these stock markets are fake.

There's no doubt he and his smart advisors also know that market cycles
can't be stopped. If the stock markets are overdue for a bear market
due to wild overvaluation, one is inevitable no matter what the government
is doing. And politically, it makes no sense at all to try and delay
the inexorable bear. They tend to run for a year or two, and early in
a new presidency is when weak stocks do the least political damage.

If straight-talking Donald Trump continues to be honest with the American
people about the state of the US stock markets and the great economic damage
the Fed's near-zero rates are causing, all this post-election euphoria is
going to yield to serious selling. If Republicans see this as unavoidable,
they will want to encourage rather than suppress it. They want the stock
bear to end well before the coming elections.

The sooner that Fed-delayed stock bear starts, the sooner it ends. That greatly
increases the odds of a subsequent new stock bull being well underway by
Trump's 2020 re-election bid or maybe even the 2018 mid-term Congressional
elections. All the Republicans including Trump have every incentive in the
world to get out all the bad news about the precarious state of the stock
markets as soon as possible.

Unlike Obama who had the great luck to start his first term right after the
first stock panic in a century when a major new stock bull was
guaranteed, Trump is starting his first term after one of the biggest
and longest stock bulls in history courtesy of extreme Fed easing and jawboning.
There is little chance the stock markets are going to rally for the next
few years without a normal 50%ish cyclical bear somewhere in there.

With valuations near dangerous bubble levels today, no matter how awesome
Trump's policies are the stock markets still face serious near-term downside.
And no matter how fast Trump's team is able to hit the ground running next
year, it still takes time to implement and execute policy changes followed
by even more time for Americans and corporations to enjoy their benefits.
Obama's economy can't be quickly fixed.

When these artificial Fed-goosed stock markets inevitably roll over anytime
here, the very same heavy gold investment demand that fueled gold's major
new bull market in the first half of 2016 will come roaring back with
a vengeance! Traders will rush to deploy capital into counter-moving gold
since it has always been the ultimate portfolio diversifier. These young
gold and gold-stock bulls will accelerate under Trump.

And not just because of an overdue stock-market bear. For all the great economic
benefits Trump's new free-market and pro-taxpayer policies will have, they
are going to really run up the deficit and national debt. Despite all Trump's
great ideas, he's certainly never been mistaken for fiscally-conservative.
All his new infrastructure spending isn't funded by new taxes, so it will
have to be fully financed with new debt.

The huge coming tax cuts, welcome as they are, will also take a major bite
out of government revenues. Hopefully eventually lower taxes will grow the
economy and tax base so much that in the long run the overall tax collections
will be higher even at much-lower rates. But for some years before that supply-side
multiplier kicks in, Trump's tax cuts will directly add to ballooning deficits
and fast-rising federal debt.

Regardless of Trump's hostile views on the Fed's near-record-low rates, big
deficit spending is going to put huge pressure on Yellen and crew
to keep rates low. They may even have to resume directly monetizing the
US debt through a new quantitative-easing campaign, conjuring new money
out of thin air to buy up US Treasuries! Both policies are highly
inflationary and thus very bullish for gold investment demand.

The high inflation hiding beneath the surface in the Obama years should become
far more evident to all under a Trump presidency. Lower taxes will boost
incomes and thus the amount of money flowing through the real economy. That
will serve to bid up prices faster. So American investors are likely to soon
see all kinds of signs of accelerating inflation, which will naturally lead
them to increase their gold investments.

Higher incomes due to lower tax rates will also unleash lots more capital
for investment. While much of this will flow into stock markets, plenty will
also seek gold. Every investor should always have at least 5% to 10% of their
portfolio invested in gold, which acts as insurance since gold moves counter
to stock markets. Interestingly big capital inflows into gold and the stock
markets aren't mutually exclusive either.

Between November 2008 just after Obama's first win during that stock panic
and August 2011, gold blasted 167% higher in a mighty secular bull on strong
investment demand. That was despite a parallel strong stock-market bull,
the flagship SPX powered 32% higher over that same span! So if great capital
is unleashed to flood into the markets, both stocks and gold benefit. Gold
doesn't need a stock bear to thrive.

So despite gold's weak reaction in the wake of Donald Trump's amazing underdog
win, probabilities still overwhelmingly favor gold's strong new bull remaining
young. The stock markets are still overdue for a major new bear market,
which will greatly boost gold investment demand. On top of that Trump's big
infrastructure plans coupled with big tax cuts are going to drive huge deficit
spending, which is bullish for gold.

Yes Trump's awesome policies spurring much-higher economic growth are wonderful
news for the US economy over the long term. But they are going to
take some years to implement and actually accrue real economic benefits for
Americans. And in the meantime, stock-market cycles won't be magically negated.
Not even mighty Donald Trump can delay the certain reckoning from the Fed's
stock-market levitation.

And if gold continues to power higher on balance in the coming years just
as it did under Obama's big deficit spending in the late 2000s, gold stocks
will naturally follow it higher and amplify its gains. That's always the
way gold stocks work due to their great inherent
profits leverage to gold. The gold stocks were actually faring reasonably
well technically Wednesday despite gold's surprising weakness after Trump's
victory.

Gold-stock sentiment was already super-bearish heading into this week's
anomalous gold action. This sector had plummeted in early October on stop
losses being run sparked by a parallel mass stopping in gold futures.
That dragged its total losses deep into massive-correction territory
at 30.9% since this young gold-stock bull peaked at a phenomenal 182.2% gain
over just 6.5 months back in early August.

But ever since then despite the rotten psychology that exceedingly-rare extreme
drop spawned, gold miners' stocks have been grinding higher on balance along
support. They stabilized along their 200-day moving average, the strongest
support zone in ongoing bull markets. And a new uptrend is forming, as is
always the case after a correction breaks the previous one. This chart sports
very-bullish technicals.

So the gold miners' stocks actually weathered the initial post-election gold
surprise fairly well. Although they understandably took a substantial hit
as confused gold-futures
speculators rushed to sell when stock-index futures rebounded violently
on election night and Wednesday, no real technical damage was done. As soon
as this post-election euphoria yields to the hard slow reality of big change,
traders will return.

And despite their enormous market-dominating gains in 2016 even now, the gold
stocks remain radically undervalued relative to the metal which drives
their profits. The easiest proxy for this relationship is the HUI/Gold Ratio,
or HGR. Gold stocks still have big gains to come even to reflect today's
gold price, let alone where this gold bull is heading in the future. The
gold miners' upside potential from here is great.

I explained this chart and its implications in depth about a month ago arguing
that gold
stocks were a screaming buy. They still are. Gold stocks are still recovering
from brutal all-time lows relative to gold seen early this year, when
the HUI was battered to a 13.5-year secular low. Back in January right at
those extreme lows, this HGR proved gold stocks were trading at fundamentally-absurd
prices and due to soar.

At worst the HGR fell to 0.093x, or the headline HUI gold-stock-index level
was just 9.3% of prevailing gold price levels. Smart contrarian traders tough
enough to fight prevailing sentiment to buy low then nearly tripled their
money by summer, an amazing gain! That left the HGR at 0.209x, still
cheap relative to historic precedent. This key fundamental indicator fell
to 0.157x in mid-October and 0.162x on election day.

Yet in the last normal years between 2008's stock panic and 2013's radical
market distortions by the Fed's unprecedented open-ended QE3 campaign, the
HGR averaged 0.346x between 2009 and 2012. So merely to mean revert back
up to normal levels relative to today's gold prices, not even overshoot,
the gold stocks still need to rally another 113% from here. That's
an easy double for contrarians willing to buy low!

So don't be misled by the markets' extraordinary head fake on Trump's surprise
victory. No matter how wonderful his economic policies prove to be, the stock
markets remain near bubble valuations and an overdue reckoning is
still unavoidable. And gold's young new bull market, and thus gold stocks'
parallel one, remains very much alive and well. Trump's win didn't magically
change underlying market realities.

This anomalous gold weakness on the anomalous stock-market surge offers an
outstanding buying opportunity. All investors, which generally remain wildly
underinvested in gold, can easily add portfolio gold exposure with the
flagship GLD SPDR Gold Shares gold ETF. And the leading GDX VanEck Vectors
Gold Miners ETF containing some of the world's
best gold stocks will really amplify gold's rebound.

I've always preferred buying the best of the individual gold miners though,
as the elites with superior fundamentals will enjoy gains far exceeding their
sector benchmarks'. The big ETFs are unfortunately over-diversified and
bogged down with many underperformers. A carefully-handpicked portfolio of
gold stocks that excludes this dross will really magnify sector gains. Why
bother owning the inferior companies?

At Zeal we've spent literally tens of thousands of hours researching
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and when. This has resulted in 851 stock trades recommended in real-time
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The bottom line is neither the stock markets nor gold acted as expected after
Donald Trump's epic win. While the former initially tanked in election-night
futures trading driving the latter to soar, these violent moves soon reversed
on a conciliatory Trump. That led traders to believe the Trump presidency
will be nothing but good news for overvalued stock markets, which would likely
seriously retard gold investment demand.

But no matter how awesome Trump's pro-growth economic policies ultimately
prove, these Fed-levitated stock markets near bubble valuations still face
an overdue bear. That's super-bullish for gold since it tends to move counter
to stocks. And Trump's big-spending agenda is going to fuel big deficits,
debt, and inflation for years to come. Investors will flock to gold and gold
stocks on balance in such an environment.

If you have questions I would be more than happy to address
them through my private consulting business. Please visit www.zealllc.com/financial.htm for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for
more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to
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